Chicago’s four primary pensions (Police, Fire, Municipal Employees and Laborers) were poorly structured. There were no safeguards to protect them from powerful pension raiders, unfulfilled promises of deferred payments and other bad practices. At present, the City of Chicago Employer contribution is underfunded by $26.8 billion.
Recently, the Illinois Supreme Court ruled that the state constitution prevents any diminution of health care benefits for retired state employees. In a 6-1 decision, the court rejected the state’s argument that health care benefits are not covered by the pension protection clause. The majority found the state constitution did not support that argument.
We currently have a defined benefits plan which is wholly unsustainable. Our Accrual multiplier per year of service is currently 2.1. Ideally, we should have an Accrual multiplier per year of service equal to 1.0. This disparity makes our current pension situation tenuous. We must ultimately transition to a defined contribution plan which will allow the future benefits to fluctuate according to investment successes.
We must adopt a common sense approach that is fair to current and future pensioners as well as taxpayers.
I support the state initiative to raise the retirement age, which previously allowed public employees to retire as young as 50 in some government pension systems and 55 in others.
We should weigh and assess the benefits of offering certain government employees the option of a one time lump sum payment.
We can replace the automatic 3 percent annual increases for government retirees with a capped, inflation-based cost-of-living factor and tax the pensions of non-residents who retire from work in the private sector, with an exemption for the first $75,000 in retirement income and enact a minimum age for the exemption.
Finally, we must implement a Full accrual system which would mandate that we pay our obligations as we go within the year in which they accrue.
An unfunded pension liability is the difference between the value of the promises made to retirees and employees for services already rendered and the funds available to pay for those promises.
Currently, the City’s six pension funds only have 50 percent of the funding needed to support the current pension system.
City’s Unfunded Pension Liabilities (projected to end of FY2012):
- Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF): $8.2 billion
- Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF): $0.9 billion
- Policemen’s Annuity & Benefit Fund (PABF): $7.0 billion
- Firemen’s Annuity & Benefit Fund (FABF): $3.1 billion
- Chicago Teachers Pension Fund (CTPF): $7.1 billion
- Park Employees Annuity and Benefit Fund (PEABF): $0.4 billion
Total Current Unfunded Liability: $26.8 billion
How Much Do City Employees and their Employers Contribute to their Pension Benefits?
- Number of retired employees and beneficiaries: 71,850
- Number of active employees: 84,400
- Average retiree pension: $41,400
- Taxpayer-supported contribution rate: 12.28%
- Employees’ contribution rate: approximately 8.81% (*five funds’ percentages vary from 8.500% to 9.125%)
- Chicago Teachers: 9% (*CPS pays 7% under collective bargaining agreement, and 2% is deducted from employees’ gross pay)
What are the two different types of pension funding?
This is all specified in the Illinois Pension Code. It is important to mention, public employees pay a significant amount towards their defined benefit pensions, an amount that is higher than Social Security contributions of private sector employees.
Funds can have their contributions set based on payroll. Five of the six City funds (not CTPF) currently use this approach.
- Every pay period, a percentage of each employee’s gross pay is deducted by his or her employer and sent to the pension Fund of which he is a member. Those percentages range from 8.50% at LABF and MEABF to 9.125% at FABF.